EUR/GBP: Sterling falls on weaker-than-expected inflation data

FXStreet (London) - Sterling has seen a sharp drop against most of its major pairs after consumer prices index-measured inflation (CPI) grew by 1.5 percent in the year to May 2014, down from 1.8 percent in April, according to data from the Office for National Statistics.

Consensus expectations had been for a decline in CPI to 1.7 percent year-on-year.

According to the ONS, falls in transport services costs, notably air fares, provided the largest contribution to the decrease in the rate. Other large downward effects came from the food & non-alcoholic drinks and clothing sectors. The largest offsetting upward effects came from motor fuels and recreation & culture.

In addition, the timing of Easter in April is likely to have had an impact on movements in the index, most notably for air and sea fares.

CPIH, which bolts housing costs onto CPI, grew by 1.4 percent in the year to May 2014, down from 1.6 percent in April. Retail price index (Jevons)-measured inflation grew by 1.7 percent, down from 1.8 percent in April.

Lower CPI gives BoE space to remain dovish

Sterling fell sharply on the data, with the assumption that benign inflation gives the Bank of England space to remain dovish for longer and delay rate hikes into 2015, despite recent hawkish comments from BoE governor Mark Carney and deputy governor Charlie Bean.

EUR/GBP is currently trading at GBP0.7997, up 0.05 percent after climbing to a high of GBP0.8005.